Recruitment agencies to face new IR35 scrutiny

Leighton Bower

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Leighton Bower

It has been announced in the Autumn Budget 2018 that the responsibility for operating the off-payroll working rules in the private sector (known as IR35) will move from individuals to the organisation, agency or other third party engaging the worker.

The change will take effect from April 2020, with an exemption for small organisations. In this article, Leighton Bower looks at what it means for recruitment agencies and intermediaries who place contractors.

What does this mean for recruitment agencies?

From 6 April 2020, medium and large businesses, agencies and third parties will need to decide whether the rules apply to an engagement with individuals who work through their own company.

Where it is determined that the rules do apply, the business, agency, or third party paying the worker’s company will need to deduct income tax and employee NICs and pay employer NICs.

The existing rules will continue to apply to the 1.5 million smallest businesses. However, the definition of a ‘small business’ has yet to be defined, and we expect this to be announced by the Government in the near future.

Yet another compliance burden

“This places an extra compliance burden on recruitment agencies and intermediaries. To keep contractors outside of the grips of IR35 we may see a reducing of their access to employment rights and a general tightening of the flexible labour market.”

“Agencies who are managing off-payroll workers will need to be aware of the change and have the necessary information to make an informed decision as to whether the workers fall within the scope of IR35”, adds Leighton.

HMRC has launched a Check Employment Status for Tax (CEST) service to help businesses determine whether the off-payroll working rules apply. This service is expected to be further improved and guidance issued before the new rules come into effect.

Lessons from the public sector

“If we look at how public-sector bodies have been addressing this since it was introduced for them in 2017, there has largely been a forgoing of proper assessments, instead assuming that all contractors are within scope of the new legislation. This has led to lower incomes for contractors and subsequently pushes them to find arrangements to minimise their losses, often resulting in large tax bills later,” comments Leighton.

Ultimately, the only winner is the Chancellor, who HMRC estimates has raised £500m in income tax and NICs since the reform.

“This could be a drop in the ocean once it is rolled out to the private sector, with the Government estimating in the Autumn Budget that it expects to raise more than £3 billion between 2020 and 2024. Clearly, it will significantly hit contractors’ back pockets”, says Leighton.

What’s next?

A further consultation on the detailed operation of this reform is expected to be published in the coming months. This consultation will inform the draft Finance Bill legislation, which is expected to be published in Summer 2019, ahead of its introduction in April 2020.

We therefore await further detail and clarification of these new rules.

In the meantime, you can find out more about our accountancy and tax services for recruitment agencies here.

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This information has been produced by Rouse Partners LLP for general interest. No responsibility for loss occasioned to any person acting or refraining from action as a result of this information is accepted by Rouse Partners LLP. In all cases appropriate advice should be sought before making a decision.

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